“Prediction markets” is to efficiently collect effective information through a futures or stocks trading mechanism. The characteristics of prediction markets include “providing an appropriate system of rewards and penalties” and “continuous revision.” With participants buying and selling contracts of future events in the markets, contract prices of prediction markets can be regarded as the prediction of outcomes of future events. Effectively collecting information and unleashing the wisdom of crowd, “prediction markets” is a new method of prediction on social science issues.

As of April 2010, visitors were from more than 4,842 cities, 121 countries around the world. Among them, there were participants from every single city in Taiwan, more than 858 cities in China and more than 1,921 cities in the United States. In addition, 1,969 contract sets (questions) and 13,437 contracts (answers or possible outcomes to corresponding questions) have being issued by the XFuture. More than 842,000 trades were executed, and approximately 214 million units of securities have changed hands. The XFuture includes broad market categories, such as politics, economy, society, sports, entertainment and international events. The diverse categories helped to attract traders of different backgrounds and interests.

According public information, market information or private information, traders place orders for the prediction of future events. Traders’ payoff will be determined by the outcome of future events. A virtual currency called “Gold” is circulated in the XFuture. However, the XFuture provides a variety of non-monetary incentives for traders, including a sophisticated ranking system and intensive data analysis on the historical performance of traders. Participants can learn and improve their predicting and trading skills over time. The user interface is designed not only to provide an easy-to-use trading platform, but also to deliver the fun factor that keeps the traders engaged.

The trading mechanism used in XFuture is the continuous double auction (CDA). The CDA is one of the most common trading mechanisms used in financial markets and prediction markets, in which buyers and sellers can set their own prices and quantities for their orders and the clearing house will settle trades automatically. In “prediction markets,” if a trader thinks an event is likely to happen, she would buy the corresponding contracts; otherwise, she would sell the contracts. Traders submit ask (buy) or bid (sell) orders to a centralized market exchange. These orders are stored in an order book.

For the limit orders, i.e. traders set the price of orders they can accept, once the bid price is higher than, or equals to, the ask price, the market exchange will settle a trade at the agreed price level. In contrast to limit orders, market orders, i.e. traders accept for any possible prices, have highest priority to deal with other orders. Thus the trade price always satisfies the prices requested by buyers and sellers.

Besides, in the XFuture, the short selling is allowed. Short selling means that a trader sells a contract before buying it. When shorting a contract, the trader must pay the margin for the maximum potential loss. Of course, if the trader’s prediction turns out to be correct, the margin will be returned to the trader’s account and the trader can earn a profit based on the price difference between trading and settling times the amount of contracts held in her position.

Based on the property of settlement prices, there are two market types in the XFuture: one is the “yes/no” market in which the settlement price is either $100 or $0, and the other is the “point-estimate” market in which the settlement price is a number between the maximum and minimum allowable trading prices. For instance, “Candidate A will win the election” is a yes/no market, while “how many votes will Candidate A get” is a point-estimate market.

In other way to observe the market type, markets in the XFuture can also be divided into two types based on the exclusivity of possible outcomes, i.e. “linked markets” and “associated markets”. In linked markets, all of the possible outcomes (answers) are mutually exclusive and collectively exhaustive, so that the margins of all possible outcomes (traded contracts) should be calculated together to derive the minimal margin requirement for each trader. Markets that do not qualify for linked margins are called associated markets.

Immediate arbitrage opportunities sometimes exist among linked markets, e.g. when the sum of the best (highest) ask prices of all possible outcomes (answers) in a linked market exceeds the maximum trading price (which is usually 100), or the sum of the best (lowest) bid prices of all possible outcomes (answers) is below the maximum trading price. The XFuture is designed, intentionally, without any automated mechanism to eliminate arbitrage opportunities. Traders are encouraged to take immediate actions when they notice the price discrepancy.